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Transaction metrics for 2017 and the first quarter of 2018 for the overall U.S. middle market for buyouts and the subsector of sub-$1B funds require context, and were mixed and divergent. For context, U.S. middle market buyout deal flow, purchase price multiples, exit activity, and fundraising continue to remain at historically elevated levels, as they do for the subset of sub-$1B funds.

While deal flow for the overall market rose in 2017 compared to the prior year, the subset of sub-$1B funds experienced a decrease. Additionally, purchase price multiples increased during 2017 for the overall market; however, the subset of sub-$1B funds saw a marginal downturn in purchase price multiples, suggesting that these sub-$1B funds were showing more discipline than at the larger end. Exit activity decreased below the long-term trend for the overall market, while the subset of sub-$1B funds experienced an increase. These metrics suggest relative discipline during 2017 for these sub-$1B funds as well as relatively favorable exit metrics.

These metrics for the first quarter of 2018 for the subset of these sub-$1B funds continued to diverge somewhat from the overall market. The tide turned during the first quarter of 2018, as deal flow for these sub-$1B funds accelerated and set an all-time record for any first quarter, while the overall market witnessed a decrease. And while exit value and volume for these sub-$1B buyout funds for the first quarter of 2018 were up and stable, respectively, compared to the prior year, the overall market saw a marked decrease in exit value and volume. These metrics indicate that these sub-$1B funds were relatively more active in deploying capital during the first quarter of 2018 than their larger counterparts, while maintaining relatively favorable exit metrics.

As for fundraising for these sub-$1B funds, after a record setting 2017, they got off to a slower start on an absolute and relative basis.

While these sub-$1B funds continue to adopt many best practices of larger funds, this subsector’s metrics and recipes for success remain distinct. As discussed further below, as these sub-$1B funds become more sophisticated and increasingly adopt a number of strategies and best practices of larger funds, their deals remain different from those of their larger counterparts and require a nimble and deft touch to accommodate the distinct characteristics of their counterparties.

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